Growth is the goal for many companies — whether you get that growth from adding another location, forming an alliance, adding services, diversifying into other areas or merging with/acquiring another business.
But not all growth is good. So, it’s critical that you properly manage it, says Kent Beachy, CPA, CCIFP, a principal at Rea & Associates.
For example, construction companies a lot of times go out of business, not when economic times are bad, but when things are picking up.
“When growth is on the horizon, they’ll go out and take on more work than they can handle,” Beachy says. “They have to pay their labor weekly, but they may not get paid for 60 or 90 days.”
A big part of growth is being able to finance it; you must have the right financing sources, such as built-up profits and/or a line of credit, he says.
Smart Business spoke with Beachy about how to set up the right systems to monitor your financial accounting and cash flow in times of growth.
What’s the first step to monitoring and managing your growth?
Along with having the right personnel in place, you must install systems to account for your growth.
Generally, if you’re adding another location or diversifying, you want to make sure that your system allows you to track that growth. Or, if you’re acquiring another business, you need to be able to divide and keep track of those numbers separately so that you can measure your ROI.
Management needs to decide which dashboards and key performance indicators are the most effective at providing data about the finances, human resources, production, etc. These metrics, which can be tailored to your unique business, will provide telltale signs.
If you see profits declining, you know that the growth is not being managed properly. Or, if jobs start to go bad because you’re stretching your employees too thin, you may need to add personnel.
You’ll want to review these indicators on a weekly, daily or monthly basis, in order to ensure you’re making the best possible decisions.
Is profitability the biggest factor for managing growth?
In the end you need to be profitable, but cash flow is key to managing growth. With enough cash flow, you can maintain the business — if you need to — while you work on your ability to make money on jobs.
Financial statements and accounting may give you a history into the profitability, but cash flow is a planning technique for the future.
How do successful businesses manage their cash flow in times of growth?
You need to do a cash flow projection based on what you know — what you’re projecting according to your budget, according to what you’ve planned for the business in the coming year.
In times where production or work is increasing, that’s going absorb more cash flow. You must have the proper means available to support it.
For example, you may project that, based on the sales backlog, you’re going to run out of cash in three to six months. By catching that, you can assess whether you will have the necessary resources available to manage the shortfall or whether you will need to access other means, such as asking your bank for an increased or additional line of credit until your customer payments come in.
You need to do a cash flow projection for the year, even though you may only have a very strong idea of what the next three months are going to look like because things are changing so much.
Then, revisit those benchmarks for the cash flow analysis or projection monthly, or more frequently if you need to.
Growth takes careful planning, to ensure it doesn’t eat into your cash flow and profits — and you and your company get into trouble.
Insights Accounting is brought to you by Rea & Associates